Will New Tools Help Small Shareholders Topple Giants?

Goliath hasn't been hit hard yet, but David is getting new slingshots.

The unending struggle between the managers who control America's corporations and the investors who own them is about to become more interesting. It might even become a fairer fight.

Last fall, the Securities and Exchange Commission clarified the rules under which investors can nominate candidates to serve on boards of directors.

In the waning weeks of 2011, just in time to meet the 120-day advance notice typically required to get onto the proxy ballot ahead of springtime annual meetings, investors in 16 major companies—including
Goldman Sachs
,
Hewlett-Packard
and
Wells Fargo
—filed petitions to amend corporate bylaws to open up the nominating process under the revised SEC rule.

ENLARGE

Christophe Vorlet for The Wall Street Journal

Meanwhile, networks are springing up online to rally investors large and small. These websites could enable investors—anyone from a dogcatcher in Dubuque with 100 shares to giant pension funds holding tens of millions of shares—to mingle online and pool their dispersed power as never before.

"Mechanisms like these," says
James McRitchie,
who runs CorpGov.net, a shareholder-activism site, "will eventually lead to the revolution in corporate governance that people have been talking about for many years."

Make that "dreaming about." In theory, whenever corporate managers and directors are overpaid and underperforming, investors should exercise their rights and throw the bums out.

In practice, most investors have long responded to bad management either by sitting on their hands or by voting with their feet. Breaking decades of inertia won't be easy.

If change does come, it might be led by people like
Kenneth Steiner
and
Argus Cunningham.

Mr. Steiner, 45 years old, is a private investor from New York's Long Island who filed petitions at five companies late last year under the new SEC rule. Over the past decade or so, Mr. Steiner estimates, he has formally made several hundred proposals to improve how companies are run—including simplifying the election of directors, giving more say over how top executives are paid and eliminating "poison pills" that can entrench management.

"It's up to the small shareholders to get these things on the agenda," Mr. Steiner says. "Institutional investors have been horribly negligent in what I consider their fiduciary duty to the people who invest with them and to the country in general. They don't want to ruffle feathers, and they're cowards."

After all, professional investors want to manage—or to keep managing—the pension and 401(k) plans at the very companies whose stocks they invest in. These folks aren't going to throw bombs at board members.

In recent years, many of Mr. Steiner's proposals have been approved by a majority of investors at companies' annual meetings. "It's sort of a David and Goliath situation," he says, "but sometimes David wins."

Mr. Cunningham, 36, is a former Navy pilot whose portfolio crash-landed in 2008. "Losing a lot of money will cause you to re-evaluate your role," he says. "You feel disempowered and disconnected even though you are the owner of your companies, and I started thinking about what I didn't like about the system."

Frustrated by how hard it is to find other investors willing to shake up moribund companies, Mr. Cunningham founded Sharegate. Likely to launch later this year, the website will join others that seek to rally shareholders, including United States Proxy Exchange, ProxyDemocracy.org and Moxy Vote.

If you think the directors at XYZ Corp. should be fired, you will be able to circulate a throw-the-bums-out proposal on Sharegate with the click of a mouse. Every other XYZ shareholder on the site will see it immediately; you will promptly be able to tell whether they agree with you.

Contrast that with the status quo, in which you can't know what actions other investors are prepared to take until your annual proxy statement arrives—assuming that any grievances haven't already been quashed by the company.

"The system has been broken for 100 years," says
Glyn Holton
of the United States Proxy Exchange, "but that's no reason to keep it broken."

The great investor Benjamin Graham wrote in 1949 that "the only way to inspire the average American shareholder to take any independently intelligent action would be by exploding a firecracker under him."

If enough firecrackers start going off, the bang just might get big enough to make a difference.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.